Free cash flow (FCF)

Definition

Free cash flow, often abbreviated to FCF, measures the cash a company generates after covering operating expenses and capital expenditures. It represents the cash available to repay debt, pay dividends, reinvest in the business or build reserves.

What it means

Free cash flow shows how much financial flexibility a business has once it has paid for the costs required to maintain or grow its operations. Unlike profit, free cash flow focuses on actual cash generated and available for use.

A company with strong free cash flow is generally considered financially healthy because it has cash available to support expansion, reduce borrowing or return value to shareholders.

How it’s calculated

A common formula is:

Free Cash Flow = Operating Cash Flow − Capital Expenditures

Capital expenditures include spending on assets such as equipment, property or technology needed to operate the business.

Example

A business reports:

• Operating cash flow of £1,200,000
• Capital expenditures of £300,000

Its free cash flow would be:

£1,200,000 − £300,000 = £900,000

This means the company has £900,000 available after funding its operational and capital investment needs.

Why free cash flow matters

• Indicates a company’s ability to generate surplus cash
• Helps investors and lenders assess financial strength
• Supports debt repayment, acquisitions and future growth
• Often used in business valuation and investment analysis

Important to note

A company can be profitable but still have weak free cash flow if large amounts of cash are tied up in capital spending or working capital.

In practice, free cash flow is one of the most closely watched indicators of a business’s long-term financial health and sustainability.